Principal-agent Problem Research Articles

The far side of capitalism: Institutions and trade financing in Manila during the long eighteenth century

AbstractSustained long‐distance trade in the early modern era necessitated institutional mechanisms capable of solving three interrelated challenges: the need to mobilize an unprecedented volume of capital and to lock it in for long periods of time, ways of mitigating the principal–agent problem across continents, and methods to internalize and distribute the high risks associated with intercontinental sailing. The case of Manila represents an alternative institutional approach to achieving market impersonality and solving the three fundamental challenges without the need for joint‐stock corporations, and extending beyond private and cultural networks. By adapting urban religious institutions such as brotherhoods and using legacy funds to facilitate pooling savings, Manileños managed to establish a capital market capable of mobilizing large resources towards trade finance during the long eighteenth century.

A duality and free boundary approach to adverse selection

Adverse selection is a version of the principal-agent problem that includes monopolist nonlinear pricing, where a monopolist with known costs seeks a profit-maximizing price menu facing a population of potential consumers whose preferences are known only in the aggregate. For multidimensional spaces of agents and products, Rochet and Choné (Econometrica, 1998) reformulated this problem as a concave maximization over the set of convex functions, by assuming agent preferences combine bilinearity in the product and agent parameters with a quasilinear sensitivity to prices. We characterize solutions to this problem by identifying a dual minimization problem. This duality allows us to reduce the solution of the square example of Rochet–Choné to a novel free boundary problem, giving the first analytical description of an overlooked market segment.

A Dynamic Principal-Agent Problem with One-Sided Commitment

In this paper, we consider a principal-agent problem where the agent is allowed to quit by incurring a cost. When the current agent quits the job, the principal will hire a new one, possibly with a different type. We characterize the principal’s dynamic value function, which could be discontinuous at the boundary, as the (unique) minimal solution of an infinite dimensional system of Hamilton-Jacobi-Bellman equations, parameterized by the agent’s type. This dynamic problem is time consistent in a certain sense. Some interesting findings are worth mentioning. First, self-enforcing contracts are typically suboptimal. The principal would rather let the agent quit and hire a new one. Next, the standard contract for a committed agent may also be suboptimal because of the presence of different types of agents in our model. The principal may prefer no commitment from the agent; then, the principal can hire a cheaper one from the market at a later time by designing the contract to induce the current agent to quit. Moreover, because of the cost incurred to the agent, the principal will see only finitely many quittings. Funding: J. Zhang is supported in part by the NSF [Grants DMS-1908665 and DMS-2205972]. Z. Zhu is supported by The Hong Kong University of Science and Technology (Guangzhou) Start-Up Fund [Grant G0101000240] and the Guangzhou-HKUST(GZ) Joint Funding Program [Grant 2024A03J0630].

Time for memorable consumption

A consumption event is memorable if the memory of the event affects well-being at times after the material consumption, as originally introduced by Gilboa et al. (2016). Our main contribution is to develop an axiomatic foundation of memorable consumption in a dynamic setting. Preferences are represented by the present value of the sum of utilities derived at each date from the current consumption and from recollecting the past. Our model accommodates well-known phenomena in psychology, such as the peak-end rule, duration neglect, and adaptation trends. We also provide foundations for a prominent special case of the representation with the Markovian property. The model is illustrated with applications in two different contexts: risk-taking behavior in a principal-agent problem and life-cycle consumption-savings decisions.

Hazard Risk Management as a Principal-Agent Problem: A Comparison of Principal- and Agent-Salient Risk Indicators

Hazard Risk Management as a Principal-Agent Problem: A Comparison of Principal- and Agent-Salient Risk Indicators

Bluer skies and clearer rivers? Returnees as silver bullets for pollution abatement in an emerging economy

Emerging economies are burdened with multiple tasks related to economic development and environmental protection. Based on the phenomenon of “brain gain,” we examine whether overseas-returned executives (“returnees”) help emerging economies better cope with this multitasking. Drawing insights from a Chinese listed firm dataset for the period 2010–2020, this study provides significant observations regarding returnees' influence on firms' environmental performance. The findings show that hiring returnees makes firms greener for three main reasons. First, returnees enjoy favorable treatment provided by the worksite, and the mood of giving back makes them inclined toward low-pollution development. Second, returnees have more green skills. Third, returnees alleviate the principal–agent problem of firms in green development. There are also some extended findings from this study. As inferred from the firms' environmental performance, returnees' overseas study experience may be more important than pure overseas work experience. Additionally, firms that green up by hiring returnees are not biased by firm seniority. Finally, if returnees are viewed as a scarce resource, conditional talent wars will emerge among firms. These findings provide insight into how emerging economies can balance economic development with environmental protection.

A risk based approach to the principal–agent problem

PurposeWe aim to generalize the continuous-time principal–agent problem to incorporate time-inconsistent utility functions, such as those of mean-variance type, which are prevalent in risk management and finance.Design/methodology/approachWe use recent advancements of the Pontryagin maximum principle for forward-backward stochastic differential equations (FBSDEs) to develop a method for characterizing optimal contracts in such models. This approach addresses the challenges posed by the non-applicability of the classical Hamilton–Jacobi–Bellman equation due to time inconsistency.FindingsWe provide a framework for deriving optimal contracts in the principal–agent problem under hidden action, specifically tailored for time-inconsistent utilities. This is illustrated through a fully solved example in the linear-quadratic setting, demonstrating the practical applicability of the method.Originality/valueThe work contributes to the existing literature by presenting a novel mathematical approach to a class of continuous time principal–agent problems, particularly under hidden action with time-inconsistent utilities, a scenario not previously addressed. The results offer potential insights for both theoretical development and practical applications in finance and economics.

Reverse mixed-ownership reform and earnings quality of Chinese private enterprises: from the perspective of state-owned capital participation

ABSTRACT This paper employs a multiple regression model to empirically investigate the economic effects of Chinese private enterprises’ reverse mixed-ownership reform from the perspective of earnings quality. The results indicate that state-owned capital participation primarily enhances private enterprises’ earnings quality by augmenting its resource support effect in obtaining government subsidies. Meanwhile, a certain degree of checks and balances is required for state-owned capital to participate in the process to mitigate the second type of principal-agent problem to exert a governance supervision effect. Furthermore, state-owned capital participation does not contribute to the value appreciation of private enterprises solely through improving earnings quality.

The effects of top-down political inspection on bottom-up public complaints in China

The principal-agent problem poses a significant challenge for Chinese central governance that constrains the effective resolution of environmental issues. This study focuses on a novel enforcement mechanism-the Central Environmental Inspection (CEI)-which was launched and implemented directly by the Chinese central government, to assess its effectiveness in motivating public complaints and solving the principal-agent problem. Using the Difference-in-Differences method, we observed a notable increase in public complaints during the inspection period, which was associated with a significant reduction in air pollution, but these positive effects disappeared once the CEI concluded. These results suggest that the increase in public complaints was driven by central government mobilization rather than a rebuilding of trust in local governments. However, follow-up inspections show that the sentiment of public complaints has a significant effect on air pollution improvements even after the inspection, suggesting that the inaction of local governments on public complaints was gradually addressed by central follow-up inspections.

ESG performance, corporate innovation and downside risk: empirical evidence from China

PurposeThis study mainly explores how ESG performance (ESG stands for Environment, Social, and Governance) affects corporate downside risk through innovation input and innovation output, thereby promoting sustainable development of enterprises.Design/methodology/approachUsing Chinese A-share listed companies from 2014 to 2022 as research samples, a stepwise regression method is used to empirically test the impact of ESG performance on corporate innovation and downside risk by constructing multiple multivariate primary regression models.FindingsESG performance is beneficial for obtaining external resources and alleviating principal-agent problems. It can promote enterprises to increase innovation input and improve innovation output, thereby enhancing their core competitiveness, and suppressing their downside risk. This inhibitory effect is more significant in non-state-owned enterprises, non-high-tech enterprises, and enterprises where the chairman and the general manager are not combined in one. Further additional analysis has found that equity concentration weakens the inhibitory effect of ESG performance on corporate downside risk, equity balance strengthens the inhibitory effect of ESG performance on corporate downside risk, indicating that a mutually restrictive equity structure is conducive to promoting enterprises to actively fulfill ESG responsibility, thereby improving corporate innovation level and resolving their downside risk.Practical implicationsEnterprise managers, policy makers, and other practitioners can clearly see the benefits of implementing ESG measures, further strengthen their confidence in sustainable development, actively apply ESG concepts to the entire production and operation process of enterprises, increase attention and implementation of ESG elements, and promote the healthy and vigorous development of enterprises and macroeconomics.Originality/valueThe research conclusions reveal the inherent mechanism by which ESG performance empowers enterprises to improve their innovation level and reverse their performance decline, effectively expanding the theoretical achievements of ESG performance in enterprise innovation and risk management.

Good Lawmaking, Democracy, and Accountability

ABSTRACT In the present paper, we analyze good lawmaking under the general aspect of democracy and accountability. We present briefly the procedure of lawmaking and accountability under the direct democracy of ancient Athens during the Classical times (508–323 BC), giving one characteristic example, followed with a comparison with modern lawmaking under representative democracy. We argue that accountability in present-day democracies has three drawbacks, that are related to (i) the principal-agent problem, (ii) the fact that accountability is only periodic since elections are held every four years (iii) the information asymmetry between government and citizens, which makes difficult for citizens to understand the issues (regarding lawmaking) in depth or hold a government accountable for its actions and decisions on various matters. We explain how the ancient Athenian democrats dealt effectively with these institutional inconsistencies. We finally conclude by offering some proposals for improving the quality of democracy nowadays, inspired by the functioning of the Athenian-related institutions.

Internationalization of Small and Medium-Sized Enterprises: Best Practices and the Emerging Concept of Foreign Champion, an Empirical Investigation

This article introduces a new theoretical concept, the “foreign champion”, which attempts to solve the principal–agent problem and improve academic understanding of foreign market entry decisions by analyzing what experts in the field consider to be best practices. Based on empirical research into the determinants of SME internationalization success, semi-structured interviews (n = 12, t = 5 h 10 min.) were conducted with industry experts, including one academic, government officials, chamber and association leaders, a venture capitalist, and several CEOs, and key testimonies were studied using qualitative analysis software. The results shed light on effective internationalization strategies and common market entry mistakes. Despite the perception of saturation, the prominence of the experts, and the large sample, there may be limitations, such as not covering several regions. The originality of this study lies in its conceptual framework, the insights gained from the select interviews, and a new concept of foreign market entry.

Interacting mechanisms: A perspective on generalized principal–agent problems

Myerson (1982) formalizes general principal–agent problems, in which agents have private information and choose actions. His contribution is best known for a version of the revelation principle in the case of a single principal but he also introduces a model of interacting principals. We push the latter forward by studying the perfect Bayesian equilibrium outcomes of the corporations’ game in which every principal proposes a mechanism to his agents. We show that several versions of the revelation principle hold in our framework and that, under certain conditions, every principals’ equilibrium, as defined in Myerson (1982), is a perfect Bayesian equilibrium outcome of the corporations’ game.

Investment and financing maturity mismatch: Moderating role of financialization in regulatory context for A-share listed Chinese companies

As the financialization issue is getting more and more attention, the behavioral motives and effects behind this appearance should not be ignored, and it is of great practical significance for the high-quality development of China's real economy to explore the impact and mechanism of the financialization trend on the investment and financing maturity mismatch of China's real enterprises. Using sample data of Chinese A-share listed companies from 2013 to 2020, this article empirically examines the impact of financialization on the investment and financing maturity structure from a new perspective of asset classification by using a fixed-effect model, and explores the mechanism of the financial regulatory environment's moderating effect on the relationship between the two mentioned above. The study shows that: there is an inverted U-shaped nonlinear relationship between the financialization of investment income and fixed income and “maturity mismatch “. The term mismatch of investment and financing increases with the degree of financialization, after reaching the critical point, it eases with the deepening of financialization. However, the specific point of view is different. In the sample interval, the investment income financialization exacerbates the investment and financing maturity mismatch more obviously; the fixed income financialization inhibits the investment and financing maturity mismatch more obviously. Under the different perspectives of the firms' ownership nature, financing constraints, and principal-agent problems, there are differences in the impact of firms' allocation of different types of financial assets on the investment and financing term structure. In addition, the regulatory effect of financial supervision weakens the inverted U-shaped relationship of investment income financialization with investment and financing maturity mismatch; it enhances the inverted U-shaped relationship between fixed income financialization and investment and financing maturity mismatch. In general, financial supervision has had a significant positive effect on investment and financing maturity mismatches. The findings have important policy implications in terms of corporate real investment, financial market development, and financial regulation, which can help promote China's economic development and stability.

Equity Incentive, R&D Input and Innovation Output: Based on the Analysis of Small and Medium-sized Enterprises

Under the influence of the general environment, many small and medium-sized enterprises are facing threats. However, some innovative enterprises continue to grow with innovation. This paper studies the relevant data of listed companies on the Growth Enterprise Market (GEM) from 2016 to 2021, aiming at exploring the relationship among equity incentives, research and development inputs and innovation outputs of small and medium-sized enterprises on the GEM. The research found that both equity incentive and R&D investment will bring positive impact on innovation output, and R&D expenditure plays an intermediary role between equity incentive and innovation results. It also inspires enterprises to alleviate the principal-agent problem through equity incentive in practice, to promote enterprise innovation and to promote the sustainable development of enterprises.

Proof of Work and Secure Element in CDN-assisted online voting

Electronic voting consistently fails to supplant conventional paper ballot due to a plethora of security shortcomings. Not only are traditional voting methods mediocre in terms of transparency, audit, and costs, but they also encompass a principal-agent problem, where acting governments have real capability for tampering. Here I propose Proof of Work by user devices to fortify integrity of votes as cast and seed-isolated time-based one-time passwords to force observable polling stations. Coupled with end-2-end verifiability the measures pro-posed are intended to improve on the issues mentioned. A state would only issue single-use authorizations to vote, while an untrusted publisher would collect and publish two unrelatable lists: votes and voters. Eventually, anyone could tabulate results. Content distribution networks are shown to be instrumental security providers. Weaknesses of proposed architecture are discussed.

Can Credibility Overcome Elite Polarization?

Abstract Political scientists Alexander Gazmararian and Dustin Tingley's incisive new book Uncertain Futures: How to Unlock the Climate Impasse contends that credibility is key to unlocking the deadlock over climate policy. They claim that fossil fuel communities have often been skeptical of any transition away from fossil fuels with good reason. In similar situations, policymakers have often failed to follow through on policies meant to mitigate economic dislocation. Drawing on a wealth of quantitative and qualitative evidence from energy-producing communities, including surveys of residents and officials alike, Gazmararian and Tingley find that different policy features that bolster credibility can build support for a transition to clean energy sources. The book provides a much-needed view of the energy transition from the ground-up. Yet the book pays less attention to a principal-agent problem at the heart of the clean energy transition: many of the elected representatives of the communities most affected by the transition don’t acknowledge any need for a transition. What's more, in a highly polarized environment, the impact of policy feedbacks is likely to be muted. Drawing on the experiences of the ACA and Canada's carbon tax, we suggest that even when the policy features that the authors propose are present, support for clean-energy policies may not rise dramatically.

Antecedents of Independent Directors on Joint Venture Boards

The presence of independent directors on corporate boards is often seen as an important means of monitoring to address principal-agent problems and of providing external resources and advice to management. In joint ventures (JVs), however, shareholder-management frictions can be lessened by appointing insiders to management and board positions, whereas access to valuable expertise, resources, and networks are provided by the partners themselves. A natural question, then, is why and when do partners appoint independent directors to JV boards? We argue that the appointment of independent directors to joint venture boards is primarily driven by principal-principal conflict considerations, which are unique in the joint venture context compared with conventional widely held corporations. Consistent with this argument, we find that the likelihood of appointing independent directors increases when JVs face more exchange hazards due to the competitive overlap between partners and the broader functional scope of the JV. However, given that JVs also have alternative governance mechanisms to mitigate shareholder conflicts, we also find that more complex contractual agreements can potentially substitute for independent directors on JV boards. Although relational governance is often highlighted as a key facet of JV governance, we do not find such a substitution effect for this supporting governance mechanism. Overall, our research therefore highlights several interesting domain translation issues when applying existing corporate governance insights to the joint venture setting. Our paper concludes with a call for future research on independent directors serving on JV boards, as JVs represent an organizational form that has been neglected in corporate governance research.

Delegation, deregulation, and business power: a comparative analysis of health insurance in Belgium and France

Abstract Business power is thought to increase over time when private actors are involved in the provision of public goods and services. This paper argues that this is partially true—and that in certain circumstances, state actors can even swiftly regain control of sectors previously ceded to private interests. When the latter fulfill some public functions on behalf or as delegates of the state, policymakers face ever greater pressures to sustain a relationship flawed by principal-agent problems—allowing business actors to derive appreciable political benefits. However, these conditions do not hold true after deregulation—when state actors retreat from a sector and attempt to direct the newly created market through licensing, norms, and standard setting. We demonstrate that deregulation sets the stage for a more competitive environment, making it harder for private interests to cooperate. This, in turn, can allow policymakers to enhance regulatory capacities and seize opportunities to highlight the shortcomings of private provision. After establishing this argument theoretically, we illustrate its implications through the comparative historical analysis of the health insurance sector in two European countries—Belgium and France. Despite their initial similarities, they experience contrasting developments regarding the welfare state’s dependency on private insurers for the provision of crucial collective goods.

Toward an alternative measure of board diversity: an exploratory study on board polarization in German stock exchange-listed companies

PurposeThe effects of board composition on performance have long been discussed in management research using fractionalization measures. In this study, we propose an alternative measurement approach based on board polarization.Design/methodology/approachUsing an exploratory analysis and applying the polarization measure to German Deutscher Aktienindex (DAX)-, Midcap-DAX (MDAX)- and Small Cap-Index (SDAX)-listed companies, this paper applies the polarization index to examine the relationship between board diversity and performance.FindingsThe results show that the polarization concept is well suited to measure principal-agent problems between the members of the management and supervisory boards. We reveal that board polarization is negatively associated with firm performance, as measured by return on investment (ROI).Originality/valueThis exploratory study shows that the measurement of board polarization can be linked to performance differences between companies, which offers promising starting points for further research.